SUMMARY OF MAIN FINDINGS

,QWKH,35KLJKOLJKWHGVLJQLƂFDQWSRWHQWLDOIRU)',DWWUDFWLRQ,QDGGLWLRQWRKDYLQJSUHIHUHQWLDODFFHVVWRDQHLJKERXULQJ FRXQWU\ZLWKDODUJHPDUNHWVL]H1HSDOEHQHƂWWHGIURPDƃRXULVKLQJHQWUHSUHQHXULDOFXOWXUHDQGDQHVWDEOLVKHGLQWHUQDWLRQDO image. Standing in the way of this potential was Nepal’s investment framework, which, at the time of the IPR, was considered RYHUO\ UHVWULFWLYH WR IRUHLJQ LQYROYHPHQW 7KLV ZDV IXUWKHU FRPSRXQGHG E\ LQHIƂFLHQW DGPLQLVWUDWLYH SUDFWLFHV DQG DQ underdeveloped private sector likely to reduce the positive impact of investment on the domestic economy. The report therefore UHFRPPHQGHGƂYHD[HVIRUSROLF\UHIRUPWKDWZHUHVFDODEOHRYHUWLPHDVIROORZVLLPSURYHWKHFODULW\DQGSUHGLFWDELOLW\RIWKH)', framework; (ii) improve the general operating conditions for business; (iii) create industry promotion packages in tourism, export manufacturing and herbal products; (iv) enhance the potential for FDI in the medium to longer term by removing bottlenecks in the production of hydropower, addressing sectoral constraints, and moving forward with the programme of privatization; and (v) create a special investment agency to implement reform of the investment framework and promote targeted investments. The PDLQƂQGLQJVIRUHDFKDUHDDUHVXPPDUL]HGEHORZDQGPRUHGHWDLOVDUHSUHVHQWHGLQWKHLPSOHPHQWDWLRQPDWUL[VHFWLRQ

Nepal has progressed towards improving some aspects of its investment policy framework in line with the IPR recommendations. Key improvements are the inclusion in the new Foreign Investment and Transfer of Technology Act of 2019 (FITTA) of provisions on national treatment and non-discrimination of foreign investors, the regulation of investment screening procedures with the possibility of appeal, and the establishment of a one-stop shop (OSS) in 2019. The OSS aims to facilitate permitting and other business procedures for new investments.

On the other hand, the comprehensive screening of all investments continues to apply and new entry restrictions (both in terms

of activities and size thresholds) were imposed. The authorities have indicated that the list of sensitive industries and the revised

minimum threshold for FDI were determined considering the existing capacities of domestic investors, the economic needs of the

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to FDI projects. They also stressed that consultations with private and public sector stakeholders were held at the ministry and

cabinet levels as well as during the process of parliamentary approval. However, the new restrictions and the minimum investment

threshold of NPR 50 million (about $500,000) have provoked great concern among investors. Several stakeholders interviewed

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engage in middle-size investments. The measures taken will have to be carefully monitored and their impact assessed regularly to

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ensure that they are not detrimental to attracting investment with potential positive impact. The Government should also ensure that they do not deprive the country of a potential stream of SME investment and seed funding for larger projects.

With regards to treatment, the use of capital controls remains an issue for investors. Even if the legislation was revised WRUHGXFHWKHQHHGRIDSSURYDOVIRUFDSLWDOWUDQVIHUVLQYHVWRUVVWLOOIDFHKXUGOHVDQGUHSRUWVLJQLƂFDQWGHOD\VIRUVRPH transactions. Finally, the country’s network of bilateral investment treaties (BITs) remains outdated.

The authorities are, however, developing a new text for a model investment treaty, and UNCTAD has provided expert advice to better integrate a sustainable development dimension. The text, whose content is in line with the core principles of international investment SROLF\PDNLQJLVLQLWVƂQDOVWDJHEHIRUHDSSURYDO7KH*RYHUQPHQWPD\ZLVKWRH[SORUHRSSRUWXQLWLHVWRPRYHIRUZDUGZLWK the modernization of its BIT network based on 10 options, as included in UNCTAD’s Reform Package for the International Investment Regime (UNCTAD, 2018a).

3.2. Improve the general operating conditions for business

The Government has made some reforms in areas that were considered in urgent need of attention in the IPR, but challenges remain. These include:

Taxation and investment incentives.7KHJHQHUDODQGVHFWRUVSHFLƂFFRUSRUDWHLQFRPHWD[&,7UDWHVKDYHUHPDLQHGXQDOWHUHG

since the time of the IPR, contributing to improve predictability, as recommended in the report.

However, the suggestion to UHPRYHPDQGDWRU\OHYLHVLQWKH/DERXU$FWWKDWDIIHFWHGWKHFRPSHWLWLYHQHVVRIƂUPVZDVRQO\SDUWLDOO\DGGUHVVHG6LQFH WKH QXPEHU RI LQYHVWPHQW LQFHQWLYH VFKHPHV KDV LQFUHDVHG 6HYHUDO VFKHPHV DUH DYDLODEOH IRU VSHFLDO LQGXVWULHV GHƂQHG DV production-based, agricultural and forest-based, and mineral industries, as well as for enterprises located in special economic zones (SEZs).

Additional incentives may be included in each yearly budget, a situation that was already signalled in the IPR as contributing to uncertainty. Investors also report coordination issues between ministries over the granting of incentives, which are not always provided despite a commitment from the authorities. The new federal structure of the country has also resulted in additional layers, which need to be integrated into the decision-making process. Important efforts have nonetheless taken place in reforming the tax administration and introducing an online payments system. The authorities have set up one-stop service centres with the goal of providing automated services that increase the speed of tax payments. The centres are also expected to support the DXWRPDWLRQIRUWKHJUDQWLQJRIVRPHLQFHQWLYHVDQGRWKHUEHQHƂWVOLNHWD[UHEDWHVZKLFKVHYHUDOLQYHVWRUVUHSRUWHGDVSUREOHPDWLF during UNCTAD’s mission.

Labour policy and access to skills. The new Labour Act of 2017 has extended its coverage to a broader range of

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employers, which disproportionately affect SMEs. Its impact on employment creation is still to be evaluated. Furthermore,

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there is no national survey to determine missing skills and no scarce list approach to issuing visas for foreign nationals. The procedures for obtaining a residence visa and work permit have not yet been harmonized and currently need to be applied for separately, although permit costs are considerably lower than at the time of the IPR.

Corporate governance and commercial justice. Company law has been updated to better align it with best practice and

improve transparency and business facilitation. Progress has occurred with regards to the adoption of modern, international accounting and reporting standards. On the other hand, contract enforcement remains problematic due to the length and poor quality of judicial procedures. Nepal ranked 151 in the relevant latest Doing Business indicator (World Bank, 2019).

Competition. The Government enacted a competition law (the Competition Promotion and Market Protection Act of 2007),

which excludes many sectors from its scope. Economic activities remain very concentrated (e.g. in transport activities), and there is no independent competition authority.

Access to land. Access to land was facilitated through the creation of SEZs and industrial estates (one of each in all seven

provinces), but elsewhere restrictions on the size and use of land have increased. This affects the growth of companies outside special areas or covered by an industrial scheme.

Intellectual property (IP). The protection of intellectual property rights (for example, patents, trademarks and copyrights)

remains a serious challenge. Addressing the problem requires not only the updating of legislation, but also increased FDSDFLWLHVWRHQIRUFHUHJXODWLRQVDQGVDQFWLRQRIIHQGHUV$OWKRXJKWKHVLWXDWLRQKDVQRWVLJQLƂFDQWO\LPSURYHGVLQFHWKH time of the IPR, an IP Policy has been adopted in 2017 that establishes some priority actions for reform. Furthermore, a QHZXPEUHOOD,3$FWLQFRUSRUDWLQJPRGHUQLQWHUQDWLRQDOSUDFWLFHDQGPDQGDWLQJWKHVHWWLQJXSRIDQ,3RIƂFHIRUDOONLQGV RI,3UHODWHGDIIDLUVLVLQWKHƂQDOVWDJHEHIRUHSURPXOJDWLRQ7KHSURSRVHGELOOLVDOVRLQOLQHZLWK1HSDOpVLQWHUQDWLRQDO commitments in the protection of intellectual property rights and could help address current gaps regarding the enforcement of IP rights.

3.3. Create industry promotion packages in tourism, export manufacturing and herbal products

Tourism. Tourist numbers increased from 338,000 visitors in 2003 to 940,000 in 2017 (UNCTAD, 2005; UNWTO, 2018).

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to upgrade air transport and rail connectivity, funded mostly through public funds and development assistance.

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Export manufacturing. 1HSDOEHFDPHDPHPEHURIWKH:72LQWKHƂUVW/'&WRMRLQWKURXJKWKHIXOOZRUNLQJSDUW\

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free access and open borders to India – with some product exceptions – even if these preferences may have been eroded by India’s reduction in MFN tariffs and preferences given to other LDCs (i.e. under SAFTA and duty free tariff schemes) (FNCCI et al., 2016). The IPR included the recommendation to leverage these trade preferences through the creation of SEZs and industrial estates, which was only recently considered after the approval of the SEZ Act in 2016. Although feasibility studies have been conducted for over 18 SEZs, only one is operational and hosts a limited number of companies. While FDI in export PDQXIDFWXULQJKDVEHHQLQFUHDVLQJIRUVRPHDFWLYLWLHVtSDUWLFXODUO\LQFHPHQWSDLQWVEHYHUDJHVDQGVWHHOtLQƃRZVLQWKH sector remain meagre overall (NRB, 2018).

Herbal products. The herbal products sector has continued to grow in importance. The number of manufacturers along

the medicinal and aromatic plants (MAPs) value chain registered as members of the Nepal Herbs and Herbal Products Association (NEHHPA) grew from 20 in 2012 to 85 in early 2018. It is estimated that the whole sector amounts to at OHDVW}SHUFHQWRI1HSDOpV*'3:RUOG%DQN$UHFHQWDQDO\VLVIRXQGWKDWWKHWRWDOYDOXHRI1HSDO0$3H[SRUWV increased almost threefold during the period 2005–2014, with exports to about 50 countries. However, the increment was primarily due to price increases driven by global demand, as the traded volume declined over the same period.

Joint support initiatives with development partners have improved the sustainability of production through extension services. However, value addition has lagged, as the absolute value of processed and finished products declined as a percentage of total exports.

Despite the mentioned initiatives, the sector has not received the policy attention envisaged by the IPR. Royalties continue to be an issue and access to land was not significantly improved. Finally, a weak intellectual property rights framework and quality certification issues reduce the sector’s attractiveness for the most demanding markets. In this context, a recent bill seeks to address existing quality certification problems through improved accreditation.

3.4. Enhance the potential for FDI in the medium to longer term by removing bottlenecks in the production of hydropower, addressing sectoral constraints, and moving forward with the privatization of State-owned enterprises (SOEs).

The IPR set out a medium to long-term trajectory for investment attraction in Nepal by encouraging hydropower generation, addressing sectoral policy constraints and moving forward with the privatization of SOEs.

Hydropower. As of 2018, existing hydropower stations had a total installed capacity of 1.07 GW, which reflects a

significant increase since 2003 (NEA, 2019). At present, total production is equally shared between 16 hydropower plants (HPP), two thermal and two solar plants that are publicly-owned, and 17 small privately-owned HPPs. All of

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them are connected to the national grid. In addition, another 23 small HPPs provide electricity in isolated areas. The Government has also concluded several power trading agreements for the export of electricity, principally to India and Bangladesh. There are plans to build an additional transmission line with India and one with China, for which feasibility studies were undertaken. The Nepal Electricity Authority (NEA) retains its monopoly on both transmission and distribution services.

Agribusiness. In 2003, in addition to land size restrictions, the Government had conflicting roles as a regulator

and as an owner of businesses in this sector, and used tariffs, subsidies and statutory price fixing for agriculture inputs in the food and beverage subsectors. These actions distorted market prices in favour of local producers.

Since acceding to the WTO, some trade barriers were removed, and the Government is keen to attract investment in agro-processing. However, these efforts were not always successful and new restrictions in some activities will likely have a negative impact on the integration of food value chains.

ICTs. The telecommunication sector has grown fast and mobile penetration has significantly increased, reaching

RYHU } SHU FHQW RI WKH SRSXODWLRQ$ QXPEHU RI ,7HQDEOHG VHUYLFHV QRZ RSHUDWH LQ 1HSDO LQFOXGLQJ VRIWZDUH development and back office functions (Verisk analytics, LinkTree, Cloudfactory, Fuse machines), cultural industries (Incessant Rain), e-commerce (Alibaba), payment and fintech services (Sewa, FI soft), and business solutions and consultancy services (SeeLogic, Thakral Onen). There are also some Nepali IT companies exporting to foreign markets. The Government’s investment in research and development (R&D) has likely contributed to this success.

However, a lack of progress towards universal literacy and access to the internet reduces the skills pool in this sector, which is compounded by the emigration of some skilled IT labour. To address this challenge, the Government has produced a Digital Framework to promote e-literacy and training. As part of this programme, it is setting up smart schools and computer labs across the country as the backbone of skills upgrading.

Regional financial services. For the sector to become export-oriented, the IPR had recommended the abolition of

foreign exchange controls, and the creation of specific fiscal and regulatory regimes for offshore financial services.

None of these reforms were undertaken, but the financial sector continued to grow through market-seeking FDI, with the help of improved governance for the sector.

Privatization. Some factors that prevented privatization in the 1990s remain in place, including that many

SOEs were running at a loss or were overstaffed. The only exceptions have been telecommunications and the energy sector, where private involvement has increased. The Government recently passed the new Public-Private Partnerships and Investment Act (2019) and is proposing a renewed emphasis on attracting private capital to invest in ailing SOEs, although major privatizations are not envisioned.

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3.5. Create a special investment agency to implement reform of the investment framework and promote targeted investments

The IPR envisaged an agency to spearhead investment climate reforms and oversee the development of industry-specific promotion packages. In 2011, the Government created the Investment Board of Nepal (IBN), which was mandated to promote and facilitate investment to Nepal for projects over NPR 6 billion ($60 million) and hydropower projects over 200 MW. Aspects of the Board’s mandate and structure are in line with global best practice, such as the strong link with the executive authority and the employment of staff with private sector experience who can cater to investor needs (UNCTAD, 2018b). The Board has been successful in negotiating and facilitating several large investments in the hydropower and cement industries, and provides follow-up and aftercare services to the larger investors it handles. It also undertakes promotion activities and has a mandate to advocate for investors’ interests within the Government. However, the creation of the Board only partially addressed the IPR recommendations, as it focuses on a limited number of mega projects and does not track and monitor smaller investments, which could have a broad and more sustainable development impact. This is likely linked to its mandate to handle PPPs, which counters good international practice calling for independent PPP units that can perform auditing and monitoring of performance during all phases of concessions (UNCTAD, 2015). The Board’s advocacy function will also need to be strengthened to move forward with business climate reforms.

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At the time of the IPR, foreign investment legislation was overly restrictive, and approval and screening procedures were unclear. There were also concerns regarding the treatment and protection of investment. For instance, non-discrimination was not formally granted to foreign investors, there were restrictions on transfer of funds, and the FDI legislation was silent on expropriation issues.

Furthermore, investors from FHUWDLQFRXQWULHVEHQHƂWWHGIURP additional guarantees under BITs. At that time the network was limited to three agreements.

Also, local courts were the only option for most investors to settle their disputes with the State.

I.1. Reconsider entry restrictions and align them with the country’s development priorities.

The legal and institutional framework governing FDI has changed with the approval, in 2019, of a new Foreign Investment and Transfer of Technology Act (FITTA). The new act repealed and replaced the previous version of 1992.

Whereas the new regime streamlines some establishment requirements, it has maintained several restrictions.

$OLVWRIVHQVLWLYHLQGXVWULHVQRZLGHQWLƂHVWKH sectors closed to FDI, for which only technology transfer is allowed. It includes services like management consulting, engineering and accounting as well as travel agencies, but has also been expanded to include animal KXVEDQGU\ ƂVKHULHV EHHNHHSLQJ IUXLWV vegetables, oilseeds, pulses, dairy businesses and other areas of primary agricultural production. On the other hand, three activities that were previously restricted are now open to FDI, i.e. beauty parlours, food processing and local catering services.¹⁶

Additionally, in May 2019, the Government raised the minimum FDI threshold from 5 million Nepal rupees (NPR) (approximately

$50,000) to NPR 50 million ($500,000).¹⁷